The version of the American Recovery and Reinvestment Tax Act of 2009 (Stimulus Package) passed by the Senate on Tuesday contains language that comes closer to putting tribes on par with state and local governments for the purpose of issuing tax exempt bonds. This has long been a sore spot for tribes, as the IRS has interpreted existing law to prohibit tribes from issuing tax exempt bonds in the same manner as state and local governments.

The Internal Revenue Code allows tribes to issue tax exempt bonds for an “essential government function,” which is defined as a function that is customarily performed by a state or local unit of government with general taxing powers. The IRS has seized upon the word “customarily” to prohibit tribes from issuing tax exempt bonds from certain projects, such as golf courses, hotels, and other revenue-generating facilities – even where there are cases of states and cities issuing tax exempt bonds for the exact same types of projects. According to the IRS, the fact that states and cities sometimes issue tax exempt bonds for these types of projects does not mean that they are functions that they customarily perform.

The Stimulus Package addresses this issue by amending the Internal Revenue Code to allow tribes to issue “Tribal Economic Development Bonds.” (Note: The language of this amendment closely mirrors that of the Tribal Tax Exempt Bond Parity Act, which was introduced in the last Congress by Senators Max Baucus (D-MT) and Gordon Smith (R-OR).)

The amendment defines a “Tribal Economic Development Bond” as a bond issued by a tribe where the interest would be exempt from taxation if issued by a state or local government.

This amendment comes with three important caveats:

1.) The bonds cannot be used to finance any portion of a building in which Class II and Class III gaming is conducted, or any property used in the conduct of gaming;

2.) The bonds must be used to finance facilities located on the reservation; and,

3.) There is a national cap on the total value of Tribal Economic Development Bonds at $2 Billion, which must be allocated among tribal governments in the manner deemed appropriate by the Secretaries of Treasury and Interior.

While this amendment isn’t perfect, it is a significant and important step toward increasing access to the debt market for tribes and putting tribes on par with state and local governments. I hope that the Stimulus Package Conference Committee retains this amendment, and that the Secretaries engage tribal leaders in meaningful consultation when allocating the national cap among the tribes.

Please check back later for updates on the Stimulus Package and its Indian Country provisions.

the Senate version also adds an important provision that automatically deems political subdivisions of Indian tribes the same as states, which should mean that tribal agencies would not need to get individual private letter rulings to issue bonds.

Washingtonian, you are correct. I probably should have included the language in my original post. It is found at page 532 of the Senate version of the bill. I’m anxiously awaiting the conference report to make sure this was kept in.